2004 was a year of relative stability for the global economy. Despite continued strength in the price of oil and other key commodities, economic growth was around 5%. On the world’s capital markets, volumes improved on 2002 and 2003, but remained below the levels reached in 1999 and 2000. Margin pressure was evident, particularly in mature markets and standardised product areas.
Against this background, Deutsche Bank delivered strong growth in profitability in 2004. Our “transformation” program, launched in 2002, has produced significant improvements in operating strength. Income before income tax expense was € 4.0 billion, a rise of 46% over 2003. Net income was € 2.5 billion, a rise of 81%. This figure includes the additional charges associated with the settlement of the WorldCom class action litigation, which was agreed in March 2005. Diluted earnings per share of € 4.53 in 2004, was nearly double 2003’s figure. Our principal performance indicator, pre-tax return on equity, rose from 10% in 2003 to 16% in 2004. In 2005, we aim to achieve 25% before restructuring expenses.
We made further progress in improving the bank’s risk profile. Thanks to efficient risk management in a stable credit environment, we reduced problem loans by 27% to € 4.8 billion. We reduced provisions for loan losses to € 372 million, € 741 million lower than in the previous year. Furthermore, we reduced our exposure to alternative assets to € 2.6 billion at the end of 2004. This compares to nearly €12 billion at the end of 2001.
Both Deutsche Bank’s Group Divisions Corporate and Investment Bank (CIB) and Private Clients and Asset Management (PCAM) performed strongly in 2004. CIB maintained its position among the global leaders. We enjoyed a record revenue year in debt sales and trading, thanks to continued leadership in high-value, structured products, which create maximum value for our clients by providing superior solutions to their complex requirements. Our advisory and origination business also registered solid growth. Our equities sales and trading business was impacted by difficult market conditions in the convertibles business during the middle of the year, but recovered in the final quarter.
Boosting the contribution from PCAM is a strategic priority for us, and I am therefore very pleased to report a 35% rise in underlying pre-tax profits in this Group Division in 2004. Corporate Division Private & Business Clients (PBC) met its ambitious target of pre-tax profits of € 1 billion, reflecting the success of the restructuring in the previous year. All product areas contributed, with a strong performance in insurance products in the last few months of the year, and positive trends in customer satisfaction. In addition, our mutual fund business, DWS, continued to attract new funds into its successful equity business, despite a challenging market. These businesses underline the strength of our offering to private customers, and the importance to us of this stable source of income. Overall, PCAM ranks among the world-leading managers of private and institutional assets, with € 828 billion of invested assets at the end of 2004.
We made further good progress with ‘phase two’ of our management agenda by investing in growth. We made focused investments in product areas and geographical regions which offer maximum growth potential. In CIB, we invested in high-quality sales and trading businesses and in our positions in the emerging markets. We completed the acquisition of Berkshire Mortgage – giving us a leading position in the North American Real Estate sector. We strengthened our Transaction Banking platform with the acquisition of the custody business of Dresdner Bank.
Private Wealth Management strengthened its market position by acquiring the Munich-based investment manager Wilhelm von Finck & Co. We also invested in expanding DWS across Continental Europe. PBC will focus this year on strengthening its consumer finance business and will invest in a new client loyalty program. Our Institutional Asset Management business experienced asset outflows in 2004, notably in the United Kingdom. We have launched a thorough review of this area, with a view to stabilizing our position. All of these measures reflect our commitment to further improve our profitability.
The needs of our corporate and institutional clients are evolving. Increasingly, clients require integrated solutions. The traditional barriers between asset classes, equity and debt, are becoming less rigid. In September, we realigned our business structure in order to respond to our clients’ changing needs. This realignment comprises five initiatives:
- We are aligning our Equities and Debt Sales and Trading businesses into a single division, Global Markets, enabling us to offer our demanding clients an integrated service across both asset classes. This includes an integrated research product.
- We are also closely aligning our Corporate Finance, Corporate Banking, and Transaction Banking businesses, which allows us to offer corporate clients the full range of Deutsche Bank’s global capabilities out of a unified coverage structure.
- We are reorganizing our Asset Management business, with an emphasis on developing our range of high-value products, and improving investment performance in our core businesses.
- We are strengthening our regional management structure and have reaffirmed our absolute commitment to our home market with the creation of a Management Committee Germany.
- We are targeting cost efficiencies in our infrastructure, by automating manual processes and eliminating redundant systems.
This program will strengthen our international competitiveness, and will inevitably involve headcount reductions. We do not take this decision lightly. We are committed, as always, to implementing these measures in a socially responsible manner and in close collaboration with the respective employee representatives. Creating a strong platform is essential, if we are to continue to invest in growth and create attractive employment prospects for our people.
Disciplined capital management continued to be an area of focus in 2004. We further repurchased shares, returning to investors the surplus capital which we have released from the sale of non-core holdings. Since the launch of the first share buy-back program in 2002 we have returned a total of € 4.5 billion to our shareholders in this way. Furthermore, at our forthcoming AGM, the Board and Supervisory Board will propose a dividend increase of 13% to € 1.70 per share for 2004. This reflects our policy of giving our shareholders a direct stake in the financial success of Deutsche Bank. It also reflects our confidence in our prospects for further profitable growth.
2004 was a success for Deutsche Bank, in many ways. We delivered strong profitability. We strengthened the strategic positioning of our core businesses. We laid vital foundations for the future, by investing in growth areas and by realigning our business structure for maximum effectiveness. All these steps are critical to our aim of creating value for our clients, our staff, and our shareholders.
We have started positively in 2005. This gives us confidence that we will deliver on the ambitious financial goals we have set ourselves. This, in turn, gives us the strategic freedom to strengthen Deutsche Bank’s position as one of the leading financial institutions in the world. We are all committed to achieving this objective.
Yours sincerely,
Josef Ackermann
Spokesman of the Board of Managing Directors and
Chairman of the Group Executive Committee
Frankfurt am Main, March 2005
